IBB 9/15/2016 – iShares Nasdaq Biotechnology Index Fund
iShares Nasdaq Biotechnology Index Fund (IBB)
Before I look at some individual charts for biotechnology stocks, I figured it was better to first look at the index as a whole and see if we can get a sense of the probable direction of the sector for the next few months. While the direction of the sector does not mean all stocks are going to follow it, it does at least let us know of any possible headwinds.
IBB - Elliott Wave Analysis
This first chart is a 10 year monthly candlestick chart that is shown in log scale. The black Waves 1-5 form a Bullish Impulse Wave Pattern where Wave 3 is an extended wave (meaning it is made up of 3 individual bullish Impulse Wave Patterns). I then sub-divided each of the the black waves with the red waves. Each of the red waves is an Impulse Wave that can also be further sub-divided.
The above chart illustrates a correction that is still in process. It does not "feel" like a correction for the index since its price is rising. However based on the Zig-Zag Wave Pattern I've illustrated, there is still significant downside risk in the index. That means all the stocks that comprise the index. What is the most likely risk? A new president that has declared war on the drug industry.
When there is an Extended Wave 3, as there is above, the usual correction area is the bottom of Wave 4 within the Wave 3 pattern. I've identified that area with the gray shaded box. This is an area where you would want to start making purchases of individual stocks more aggressively. That timeframe would probably be sometime around or after April 2017.
IBB - Fibonacci Retracement Tool
In order to see where Wave B may be running into significant resistance, I placed a Fibonacci Retracement Tool on the iShares Nasdaq Biotechnology Index Fund's recent downtrend. This is a 2 year weekly candlestick chart.
As you can see, IBB's price has completed its minimum retracement of 38.2%. Once a minimum retracement has been completed, investors must stay on high alert until an uptrend can be confirmed.
The IBB's price though appears to be forming into a Bullish Engulfing Candlestick Pattern on buying volume that will be higher than last week's shortened trading week. This would seem to confirm Wave B's uptrend.
Let's assume the index does go on to form the bullish reversal candlestick pattern on the weekly chart. If it does, I placed a Fibonacci Extension Tool to calculate some further upside price targets for Wave B. The tool was placed on a probable new Wave 1 and Wave 2 in a Bullish Impulse Wave Pattern. If a bullish reversal candlestick pattern does form at the end of this week, that would be the beginning of a Wave 3. That would mean that biotech stocks start moving upwards again next week.
$340 - $375 is the area identified by the gray shaded box; this is the most likely upside target area for Wave B.
iShares Nasdaq Biotechnology Index Fund - Summary
There is still time for some additional upside movement as Wave B completes, however I would start to lighten up on positions as the election draws near and lock in at least some profits due to the potential downside risk. With the potential bullish reversal candlestick pattern forming, I will most likely look to re-enter into a long position with VRX in the next day or two.
But please seriously consider this, a 6.5 year uptrend does not finish its correction in 6 months. That was only Wave A of a probable Zig-Zag Wave Pattern. Another leg down according to the Elliott Wave Pattern seems most likely. Wave C in a Zig-Zag Wave Pattern breaks below the low from Wave A. If that happens, the correction would be closer to 2 years which seems more feasible in length for a 6.5 year uptrend.
In the meantime, enjoy the remainder of Wave B to the upside for the next several weeks.